For over half a century I have worked as an investment banker, and then written about Wall Street, highlighting the market upheavals of 1973-4, 1987, 1999-2000, and 2007-2008 and their ramifications for the American economy,the disparity of wealth in the nation and the continuing risks of another deep global financial crisis.

Previously I was National Editor and Senior Editor at Forbes Magazine, New York Bureau Chief of The Boston Globe and Wall Street correspondent of The Economist.

Bernanke and Draghi Deserve The Nobel Prize For Avoiding Another Meltdown

Not since 2008 has the global economic system witnessed such a coordinated easing pattern in the supply of money by leading central banks– first in the US, then in Europe, and finally a new start in China.

Ben Bernanke‘s Fed promises to keep interest rates low as possible until well in to 2014 so as to keep mortgages cheap and spur home-building, the weakest link in the US economy right now. The move was made on August 9th, 2011– after an 18% fall in US common stocks in just over two weeks. Since then, stock market averages have made a climb higher at any point since the last peak in October, 2007 when the Dow hit 14,100. That’s just another 1200 points or or some 7-8% from the close Friday of just under 13,000.

On November 30th, 2011 the Fed, the European Central Bank , the Bank f Japan, the Bank of Canada and Switzerland began offering liquidity swaps to under-capitalized European banks– a clear step forward in providing funds necessary to prevent a Lehman-event meltdown as occurred in September, 2008

Then, the ECB, the European Central Bank, began to lend over $1 trillion at a measly 1% to under-capitalized European banks for a 3 year duration. This easing– similar to what the Fed did for US banks in the fall of 2008, means the French, Italian, Spanish, Irish and British banks would not have to face huge capital losses on their sovereign bank holdings.

You can see that the central banks– in response to the financial crisis in Europe– have been following each other– step by step- printing money and expanding their balance sheets to new record asset peaks.

The Fed promised in January to extend the period for holding interest rates down for an additional 18 months– until late 2014. It also has been continuing Operation Twist, by which its Open Market Committee, buys long maturity paper like mortgages and sells into the market short term securities with hardly any yield. This trade has as its goal stimulating the amount of cheap mortgage money to make home buying or refinancing at cheaper rates possible.

The Bank of England and the European Central Bank under Mario Draghi have been playing catch-up with the Fed. Draghi, in particular, is freely lending huge piles of cheap money so that Europe’s banks can pay off their short term sovereign debts with hardly any cost of borrowing. As the money is lent for 3 years, it means that there is now a 3 year interlude without a meltdown to try and stabilize Europe’s finances. The Financial Times banking columnist John Plender told me today that in effect the ECB is really “exposing weak banks to more sovereign debt on their balance sheets,” a condition that may cause serious problems down the road.

The same risky scenario faces the US , which must face reducing its budget deficit and its debts to the rest of the world, especially China and Japan. By contrast with Europe, some large US banks are better capitalized than their European brethren.

The economic advantages of cheap plentiful money were defended by Bernanke this– just as you would expect. He made it clear that the burden in economic policy rests on monetary measures– rather than fiscal policy. Central banks are expected to control the availability of credit in the financial system as a stimulus to creating moderate economic growth by helping to raise asset prices.. Without the easy money, the rate of growth would decline. So, with fiscal policy restricted in terms of a massive stimulus to economic activity, it has fallen on the Fed and the ECB and the BOE and the PBOC to protect the global economy against a return to deflation, recession and widespread austerity. So far, its working in the American stock market and the price level of some key commodities.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.